Question 4 A consumer has income of $15,000. Pillows costs $35 per pillow, and soda costs $70 per bottle. Draw the consumer’s budget constraint (put pillow on the horizontal axis). What is the slope of this budget constraint? Suppose his income increases from $15,000 to $20,000. Illustrate what happens if both pillows and soda are normal goods.The price of pillows rises from $35 to $40 per pillow, while the price of sodas is unchanged. For a consumer with constant income of $15,000, show what happens to consumption of both goods (assume both goods are normal goods). Decompose the change into income and substitution effects. Under what circumstance(s) if any can an increase in the price of pillows induce a consumer to buy more of that good? Explain.Explain how a consumer should allocate expenditure in order to achieve maximum satisfaction and analyse how a rise in income might affect that allocation.

An economic notion known as a budget constraint denotes the upper bound on the consumption bundles…

Answered: Question 4 A consumer has income of…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question 4

A consumer has income of $15,000. Pillows costs $35 per pillow, and soda costs $70 per bottle.

Draw the consumer’s budget constraint (put pillow on the horizontal axis). What is the slope of this budget constraint?
Suppose his income increases from $15,000 to $20,000. Illustrate what happens if both pillows and soda are normal goods.
The price of pillows rises from $35 to $40 per pillow, while the price of sodas is unchanged. For a consumer with constant income of $15,000, show what happens to consumption of both goods (assume both goods are normal goods). Decompose the change into income and substitution effects.
Under what circumstance(s) if any can an increase in the price of pillows induce a consumer to buy more of that good? Explain.
Explain how a consumer should allocate expenditure in order to achieve maximum satisfaction and analyse how a rise in income might affect that allocation.

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